Beyond costs: The dominant role of strategic complementarities in pricing

This paper documents five empirical facts about the role of strategic complementarities in firms’ price-setting behavior, using administrative data on Chilean firms. (1) Strategic complementarities play a dominant role in price setting, exerting a stronger influence than changes in marginal costs. (2) While the strength of strategic complementarities varies across sectors, it consistently outweighs the role of cost changes. (3) In high-inflation environments, firms become more responsive to changes in their competitors’ prices. (4) Firms respond more strongly to competitors’ price increases than to price decreases, mirroring the ‘rockets and feathers’ phenomenon of costs. (5) Strategic complementarities are stronger among firms with fewer competitors, larger market shares, and broader customer bases. These findings suggest that strategic complementarities—a source of real rigidities—are quantitatively important, state-dependent, asymmetric, and shaped by market structure.